April 22, 2012

How Have Swipe Fees Affected Everyday Banking?

What do rapper Lil Wayne, television personality Suze Orman, and comedian George Lopez have in common with checking accounts? Oddly enough, all were affected in one way or another by the Durbin Amendment, the legislation that instructed the Federal Reserve to cap debit card swipe fees at roughly $0.24 per transaction, inadvertently leading to a growing market for celebrity prepaid card endorsers.

You see, legislators originally took from the banks the power to charge merchants whatever they wanted for debit card use in the hopes that it would lead to lower prices for consumers and thereby jump-start the economy. But we’re instead seeing higher checking account fees and a restructuring of the payments landscape, in which prepaid cards – a natural checking account alternative – are steadily gaining market position.

This is all attributable to the fact that the Durbin Amendment only applies to debit cards issued by banks with at least $10 billion in assets, whom it will cost roughly $9.4 billion in revenue annually, according to Card Hub. In other words, large banks have an incentive to make traditional checking accounts and debit cards less appealing as well as to push consumers toward unregulated alternatives like credit cards and prepaid cards.

We have indeed already seen this happen, as many big national banks have cut debit card rewards programs and either experimented with or added new checking account fees. In addition, new prepaid card offers have been steadily popping up. Some have the backing of the aforementioned superstars. Others, like the Google Wallet Prepaid Card, have an eye to the future: mobile-phone-based contactless payments.

While Heartland Payment Systems, the 5th largest payment processor in the U.S., says that its stable of merchants has saved roughly $126 million as a result of the Durbin Amendment, this law certainly has not lived up to its intended purpose and will likely be known more for a restructuring of the payment landscape when all is said and done.

Anyway, now that you know why the checking and prepaid card markets have changed, it’s time to give you some insights into how to navigate this new payments landscape. We’ll start with prepaid cards, which have two general applications: 1) as alternatives to traditional checking accounts and 2) as financial literacy teaching tools for adolescents. According to Card Hub’s Prepaid Card Report, the best offers currently on the market are:

Green Dot Prepaid Card: This is the best prepaid card turned replacement checking account given that it can be free to use as long as you load at least $500 per month (e.g. your paycheck via direct deposit) and use Green Dot’s network of 18,000 ATMs to withdraw cash.

American Express Prepaid Card: This is the best prepaid card to use as a financial literacy teaching tool largely because it has a simple, relatively inexpensive fee structure. Prepaid cards in general are well-suited to this purpose because they give young people experience budgeting and using plastic to pay for things while also allowing parents to review their children’s spending habits online. Not only can you apply for an Amex Prepaid Card on the Web, but you may also be able to find them in your local Wal-Mart, as American Express recently announced plans to test the sale of these cards at the megastore.

With that being said, there’s little reason to leave your bank if you haven’t been assessed new fees or seen the usefulness of your account decline as a result of debit card usage restrictions or rewards cuts. However, if you’re unhappy with the rates provided by your savings account (the economy’s fault, not the Durbin Amendment’s), NetSpend offers a savings account together with its prepaid card that pays 5% APY on balances up to $5,000.

Checking accounts losing traction and prepaid cards meeting a variety of different consumer needs – such is the state of post-Durbin personal finance.

This article comes from Card Hub, a leading online marketplace for credit cards, prepaid cards, and discounted gift cards.